Tampa SDIRA Workshop

Self-Directed IRA Workshop

Atlanta, GA (September 22 & 23) with Special Guest

DYCHES BODDIFORD

and

Columbus, OH (December 1 & 2)

Mitt Romney ballooned his IRA to $100 million. We’ll Show You How He Did It.

“In the wake of news reports last week that presidential contender Mitt Romney owns an individual retirement account worth as much as $100 million, questions are growing over how it could have gotten so big when contribution limits are capped at $5,000 or $6,000 a year.[1]” Reuters article by Lynnley Browning, January 23, 2012

He did it tax-free and legally. How did he do it? He did not release all of the details, but we have some clues. Remember, Romney was in the business of buying companies for next to nothing, turning them around and selling them.[2] Or he and his partners would look for companies that were not worth much as companies – but those companies had assets, that if sold separately to the right people, had lots of value. He made a fortune by buying companies, and then either turning them around or splitting them up & selling the assets. Bottom line, they bought companies for very little and sold them or their assets for quite a lot.

Over the years more & more information has come out that has allowed us to put together a picture. We’ll dig into “what we think he did” and “what that means to you”.

Lend money and get a piece of the deal aka “shared appreciation mortgages”

Crypto-Currencies

Tax liens

Private equity/PPM’s

Restricted stock or options “from work”

Self-storage units

Mobile home parks

Hard money lending/private lending

Buying discounted debt

Foreign real estate

Elder-care/special-needs housing

And much, much more….

We will cover “how to” on all of these deals – with LOTS of Q&A and open discussion. In prior workshops we have spent approximately 50% of the time in free-flowing back & forth. That “back & forth” involves both legal discussion by an expert in the law (moi) and creative structuring by audience members, many of whom are very, very experienced in structuring creative & profitable deals. Indeed, my audiences are so sophisticated that I invariably end up incorporating techniques & thoughts I gleaned from them in subsequent workshops. Ask me about the attendee who got a $50 bottle of scotch for coming up with the concept of a “CESA[4] Holding Child”…..

Which annual retirement income would you prefer: $98,166 or $513,801? One would think that choice a no-brainer. And perversely, it is. Most people opt for the $98,166. Baffling. Lemming City.

The ONE THING that makes the difference of $415,635 per year of retirement income? Investing via a Roth IRA (or even better, Roth Solo 401k)[5] versus making the exact, same investments “in your name” or “in an LLC”.

Yes, it is that simple. Choose the right type of account (and follow the rules) for your investments and quintuple your income. That is the power of tax-free investing. Here’s the example & the math that got me to the numbers: An investor starts with $100,000 in a Roth Solo 401k or Roth IRA. For ten years, he[6] engages in one “buy, rehab & sell” deal per year.[7] His return on each deal is 30%.[8] In the taxable deal, his combined state & federal tax (including social security taxes) rate is 35%. Whatever money is available is reinvested in the subsequent year into another “buy, rehab & sell” deal. After year ten, the investor decides that a more passive approach is in order. He invests the balance of his investment funds in projects that provide an annual return of 12%[9] and reinvests the proceeds for ten years. After year 20, he continues to invest at 12%, but now uses that income to live on.

First the verdict, then the trial: In the taxable example, the investor’s annual after tax income would equal $98,166 per year. In the non-taxable example, the investor’s annual income would equal $513,801 per year. That’s a difference of $415,635 per year – attributable SOLEYto investing via a Roth 401k or Roth IRA account instead of in one’s name or via a taxable entity (e.g. – LLC, S-Corporation, etc.).

Too good to be true! Hogwash! Snake oil! Clintonian lies! Trumpian “facts”! Fake News! Great – review the details and show me how & why I am mistaken.[10] Here we go:

Here’s what a single buy-sell deal per year for ten years at a 30% return and 35% tax-rate looks like:

Roth Savings Buy-Rehab-Sell One Property /Year for Ten Years

TAXABLE

Initial Cash

Profit on Flip

Tax on Profit

Cash Balance

NON-TAXABLE

Initial Cash

Profit on Flip

Cash Balance

1

$100,000

$30,000

$10,500

$119,500

1

$100,000

$30,000

$130,000

30.00%

2

$119,500

$35,850

$12,548

$142,803

2

$130,000

$39,000

$169,000

$ 100,000

3

$142,803

$42,841

$14,994

$170,649

3

$169,000

$50,700

$219,700

35.00%

4

$170,649

$51,195

$17,918

$203,926

4

$219,700

$65,910

$285,610

5

$203,926

$61,178

$21,412

$243,691

5

$285,610

$85,683

$371,293

6

$243,691

$73,107

$25,588

$291,211

6

$371,293

$111,388

$482,681

7

$291,211

$87,363

$30,577

$347,997

7

$482,681

$144,804

$627,485

8

$347,997

$104,399

$36,540

$415,856

8

$627,485

$188,246

$815,731

9

$415,856

$124,757

$43,665

$496,948

9

$815,731

$244,719

$1,060,450

10

$496,948

$149,084

$52,180

$593,853

10

$1,060,450

$318,135

$1,378,585

The difference between “taxable at 35%” and “Tax-Free Via Roth 401k/IRA” after ten years equals $784,732

Now we invest the $593,853 (taxable) and the $1,378,585 (tax-free) at 12% for ten years. The income is reinvested.

Roth IRA/401k Savings 12% Compounded Over Ten Years

TAXABLE

Initial Cash

Return on $$$

Tax on Profit

Cash Balance

NON-TAXABLE

Initial Cash

Return on $$$

Cash Balance

1

$593,853

$71,262

$24,942

$640,174

1

$1,378,585

$165,430

$1,544,015

2

$640,174

$76,821

$26,887

$690,107

2

$1,544,015

$185,282

$1,729,297

3

$690,107

$82,813

$28,985

$743,936

3

$1,729,297

$207,516

$1,936,813

4

$743,936

$89,272

$31,245

$801,963

4

$1,936,813

$232,418

$2,169,230

5

$801,963

$96,236

$33,682

$864,516

5

$2,169,230

$260,308

$2,429,538

6

$864,516

$103,742

$36,310

$931,948

6

$2,429,538

$291,545

$2,721,082

7

$931,948

$111,834

$39,142

$1,004,640

7

$2,721,082

$326,530

$3,047,612

8

$1,004,640

$120,557

$42,195

$1,083,002

8

$3,047,612

$365,713

$3,413,325

9

$1,083,002

$129,960

$45,486

$1,167,476

9

$3,413,325

$409,599

$3,822,925

10

$1,167,476

$140,097

$49,034

$1,258,539

10

$3,822,925

$458,751

$4,281,675

The difference between “taxed at 35%” and “tax-free” has now risen to $3,023,137 over 20 years in our example. If one were to continue to invest at 12%, but now live off of the income, the after-tax annual income would equal $1,258,539 x .12 or $151,025. If taxed at 35%, the after-tax cash flow would equal $151,025 x .65 = $98,166. Meanwhile, the tax-free amount of $4,281,675 invested at 12% would generate $513,801 per year for a difference of $414,228 per year.

What is worth to generate those numbers? Certainly a bit of homework (starting with this course) and some effort (setting up & maintaining the accounts, following the rules, employing good legal help, etc.).

Many of you (especially the engineering types) will not believe the numbers above. Fair enough. I have two responses to that: First, get the XL (email my assistant, Tina, at help@realestatetaxlaw.com and ask her to send you the “Roth v Taxable XL) and run your own numbers – the big picture will not change, and the savings will still be well worth the effort. Second, my example was modest. I have seen a number of clients do far more deals across a number of accounts – 401k’s and SDIRA’s and Health Savings Accounts and Coverdell Educational Savings Accounts. I have watched clients cherry-pick deals for their Roth accounts that resulted in higher returns than what I used in my model. I have seen them use leverage (IRA’s, 401k’s, HSA’s, and CESA’s can and do borrow) and partners to super-charge their returns. I have seen the results of compounding over not 20 but 40 years. In short, I was conservative on the numbers.

Bottom line: VAST sums stand to be saved. But those savings will not magically accrue. One must take informed action or suffer the default (“taxable”) result.

I now buy almost ALL of my investments via SDIRA’s/401k’s/CESA’s/HSA’s

(and why you should too)

I make a nice living as a “parasite upon the Socialist Bureaucratic State”[11] aka “tax attorney”. I live off a portion of my law practice’s income. I do not need the income from my investments. Indeed, all I will do is reinvest such income in….more investments.

So why pay tax? Why not invest via IRA’s, 401k’s and the like?

The biggest objection I hear: I want to have easy access to the investment income, even if I probably never will actually make use of that access.

Lunacy.

If you have enough to live on and are very likely to simply reinvest any investment income then “access” comes at far too high a price. PS: You probably can access some of the money tax-free if absolutely necessary, we will discuss how to do that.

Bottom line: If you are just going to grow the money, then easy access to it is a small price to pay for “tax-free”. You do remember how much “tax-free” is worth, right?

Also: If you are 60 or older, you can likely get IMMEDIATE ACCESS TO THE TAX FREE INCOME. In other words, you can probably “do deals” in your Roth IRA or Roth 401k and then take the profits out TAX-FREE and IMMEDIATELY.

With Great Power Comes Great Responsibility

Nothing in life is free and tax-free investing is no exception. There are rules. And as is typical for anything done by Congress, the rules are neither sensical nor simple. But remember – they are very much worth following. That’s where I come in.

IRA Kryptonite: Prohibited Transactions

The IRS correctly views SDIRA’s as cash cows for the government. Specifically, a one-dollar mistake can cost the IRA owner a million dollars in taxes and penalties. You read correctly: If your IRA pays $1 to the wrong person, you could end up paying $1 Million to the government. Here’s an example:

Your IRA has assets & cash worth $1,666,667.

Your IRA lends $1 to your mother.

That loan is a very basic & blatant “Prohibited Transaction” under Internal Revenue Code Section 4975.

Without going into details, a Prohibited Transaction often results in the IRA losing 50% to 60% of its assets to government – no matter how small the Prohibited Transaction.

60% of $1,666,667 is $1,000,000.

A $1 mistake can cost $1,000,000

Can you blame the IRS for looking for small mistakes that get them millions of dollars? Like it or not, that IS what they are doing. But we are not helpless.

My example above was very simplified to make a point. Unfortunately, the Prohibited Transaction rules themselves are not so simple. There are many subtle ways to accidentally destroy your IRA. The rules are often grey, subtle and easily triggered by accident.

That’s also why we shall spend a great deal of time on the prohibited transaction rules. We will cover in detail. Knowing these rules is simply part of the cost of doing business tax-free. And remember the savings when judging the price – it’s a bargain.

“I already know the Prohibited Transaction rules”

Let me guess – you read it on the internet! The problem with the internet is “too much information”. Which information is correct? Which is not? Did you miss something?

I can’t tell you how many clients have called for me to create a “Check Book LLC” and in order to get the lowest possible price on the LLC have stated “I know the Prohibited Transaction Rules and do not need you to charge me to review them”. They then explain the deal that they want the LLC for and that deal involves a (you guessed it)…..Prohibited Transaction. Penny-wise, pound foolish. Ditto with “my custodian told me so”. The less scrupulous custodians will tell you what you want to hear in order to get the account opened (and to keep it). Even the better ones have employees who lack the experience to really know “what will fly”.

Invest in protecting those massive tax savings. Get the straight skinny from a practicing attorney who:

Has taken the IRS to Tax Court on SDIRA’s twice – and won twice without my clients having to endure the expense and stress of a trial

Has been through multiple SDIRA audits and has first-hand experience with how the IRS deals with such cases

Has reviewed thousands of deals for compliance with The Rules

Has travelled to DC to listen to what regulators are thinking & looking for

Has travelled to DC to access records found only at the Tax Court, including

IRS Attorneys’ Briefs – these lay out their arguments & thinking and how they are likely to approach future cases

Witness Testimony – I like to hear what questions were asked by the IRS and what they did with the answers

Motions – I like to see how they were drafted and what each particular judge wants to see

Tax returns – They are often part of the record with just SSN’s redacted out. I learn a lot from reviewing what people have done – including how they made their money!

Has presented nationwide for dozens of groups, including multiple custodians

But then again, I’m sure you could that quality of information somewhere on the internet. Which should suffice to protect the millions of dollars in taxes you won’t pay. Sure.

Checkbook Control LLC’s (and Trusts)

There is more internet misinformation on this topic than any other SDIRA topic I can think of. The reason? Sales. It’s soooo easy for someone with little or no clue (including many attorneys who know nothing about tax or IRA law) to sell “Checkbook-Control LLC” templates for a low price under the guise of “customized agreements”. If by “customized” they mean filling out your name and address. Such poorly-conceived arrangement bear the seeds of IRA destruction.

Ask Rodney Niemann. He’s an engineer who was faced with the extinction of his business due to the 2008 Crash. He immediately started flipping houses to make up the shortfall. And managed to make $127,000 his first year. That’s a smart man. Indeed, the Tax Court even made an uncharacteristic comment that they found Niemann to be a “very smart man”. And yet….he paid a few hundred dollars for a “Checkbook Control LLC” and used it to unintentionally destroy his IRA. We will discuss this case[12] and others in class – and how to avoid Niemann’s disastrous results.

I have a lot of experience with “Check Book LLC’s” – including in audits. We will separate internet fiction from established fact, including:

Who should have one – and who should not

Who should manage them

Benefits and downsides

What should be in the operating agreement

What the case law really says

BONUS FOR THE ATLANTA WORKSHOP ONLY: Dyches Boddiford will be in attendance. He is a first-class teacher on asset protection, tax savings, and investments techniques. He was working on these issues when I still chasing skirts in high school. For more about Dyches, see assets101.com.

What You Will Learn

Choice of Account: Which type of account is best for you. We will cover IRA’s, 3 different types of 401k (Solo, Safe-Harbor, and “Regular”), SEPS, and SIMPLE’s.

Roth vs. Traditional: Which is best for you? And why you do not make “too much” to invest in a Roth.

Self-Directed Health Savings Accounts: How to pay for swimming pools and other health-related items via your HSA. Why you should create an HSA today if you qualify, even if you can only contribute $100. What it takes to qualify, and a tax-efficient alternative if you do not qualify. How I pay for medical tourism overseas via my HSA.

Self-Directed Coverdell Educational Savings Accounts: When they are/are not better than 529 plans. How to pay for K-12 private school + university + home computing needs tax-free. How to make small CESA’s into large CESA’s. How to beat the “dissolves at age 30 rule” – how to make your CESA immortal.

Prohibited Transactions: We will spend approximately a third of the class time on this all important topic. We will cover this subject in detail, including “what the IRS has not yet figured out but probably will”. “I read it on the internet” or “my custodian told me” isn’t good enough – we will thoroughly educate you to protect your millions in tax savings.

Leveraging: Powerful techniques to use other people’s money to grow small accounts into very large accounts including examples of what anonymous clients have done. We will cover both debt financing and equity financing (i.e. – partnering). We will teach you about UBIT – a 40% or greater tax on your IRA – and how to avoid or reduce it as well as when it is worthwhile to pay it. This discussion will cover how one landlord managed to get 50 free & clear rentals into his Roth IRA – he will never pay income tax on those rentals, nor shall his grandchildren when they inherit.

Options: How anonymous clients have used – and misused – self-created option contracts to greatly expand their IRA’s. “Strategic” options versus “Tactical” options. We will also discuss when options trading on an exchange works in an IRA –and when it does not.

SDIRA Audit & Tax Court: Very few attorneys can credibly speak on these subjects. I can and I shall. We will cover what the IRS looked for, what they are now looking for, and how & why we beat them. We will discuss which cases go to trial – and why – and how “not to be that one”. Conversations with IRS personnel also give us a sense of “optics” – what do the Nice Men in Black want to see? And if possible, can we give it to them?

Deals. How to use these accounts to invest in:

Rental properties (with or without leverage/partners)

AirBNB properties

Buy-fix-sell properties

High-rate loans (hard money)

Discounted debt

Private offerings

Self-Storage

Assisted Living

Foreign Real Estate

Deferred Comp (Options, restricted stock) from work

Crypto Currency

Tax Lien Certificates

Phenomenal Networking & Brainstorming. The people who attend my workshops generally are creative, thoughtful, and experienced. The ideas they come up and the transactions they actually engage in are worth the cost of attendance alone. I have attended similar events put on by others for the networking, with the actual content being something of a bonus. Take advantage – get dinner & drinks with very bright, experienced & creative people. And listen to their questions & comments during the class, for they shall be learning from yours.

———————————————————————————————————————————————————————-

Tuition. $1,995 per person.

Email John at johnhyre@realestatetaxlaw.com for invoice and payment info.

Discount. Clients (i.e. – either bought time from me, or bought one of my 3 home-study courses) are eligible for a discount of $795, which reduces the tuition to $1,200. Likewise, clients may bring a spouse for an additional $299. Email Tina at help@realestatetaxlaw.com for the discount code.

Location.

Hotel.

Time. Registration at 8:30, Class from 9:00 am to 5:00 pm

Footnotes

[1] It later came out that he apparently used a SEP IRA, so the contributions were probably closer to $25,000 per year. Still, pretty impressive! Certainly better than his opponent who would have “invested” the $25k per year in some government boondoggle and lost it all.

[2] Sounds like what a lot of my clients do with houses. Same idea, smaller scale.

[3] When I say “IRA” I really mean “IRA, 401k, Health Savings Account and Coverdell Educational Savings Accounts”. These accounts all follow very similar rules. And between them, you can contribute up to $75,250 per year that would then grow tax-free (Roth 401, Roth IRA, HSA or CESA) or tax-deferred (Traditional IRA or Traditional 401k).

[5] And no, your income is not “too high” to invest in a Roth. Your CPA is wrong, and I can prove it.

[6] Yes, “he”. I shall adhere to old-fashioned grammatical conventions. Rational people shall impute the appropriate gender sans taking offense. And no, I will not “xe” or whatever politically correct & sophomoric Doublespeak happens to be in vogue among college professors this week.

[7] I am assuming that UBIT (you will learn about what that means & why it matters at the workshop) does not apply in this example.

[8] This rate of return is probably low. I know investors who consistently do far better on rehab deals. Indeed, I’d be tempted to cherry pick the best deals for the 401k, increase the profit per deal, and to lower the number of deals done to reduce the risk of a UBIT issue.

[9] Easily done via rental properties, private “hard money” loans, buying discounted debt, and the like. Again, I have seen investors who consistently exceed the rate of return I have posted. And I have seen all sorts of investments via these accounts – oil & gas, livestock, crypto-currency, private equity offerings, option trading, you name it and I have probably seen clients do it.

[10] The screen shots are from and Excel spreadsheet. I am happy to email the XL so that you might fiddle with it, substitute numbers that fit your situation (e.g. – investment return, tax rate, etc.), or disagree with my methodology/numbers. Please email us at help@realestatetaxlaw.com and include “Roth Comparison XL” in the header and we’ll send you the XL.

[11] I just want a few small crumbs off of Leviathan’s table, that’s all.

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